Cleaning Wall Street's dirty laundry

Independent letters, researchers make their mark

By

ThomCalandra

SAN FRANCISCO (CBS.MW) -- So far, the 21st century is a bust for small investors.

Largely barred from exclusive hedge funds, individuals are fending for themselves in a stock market that has produced gaping losses for all the folks who thought they were trading geniuses in the 1990s.

Wall Street's best offering, the research of its sales-oriented analyst teams, is bogus and of little help to individuals. As Charles Biderman of Trim Tabs Investment Research points out, Wall Street's reports on stocks are loss-leaders. "They don't make any money on it, and it shows," says Biderman. Wall Street reports generate no specific profits for the brokerages, and their substance is like thin gruel -- almost always a menu of what top executives tell the coteries of analysts who track their companies.

Meanwhile, the smallest companies, the ones whose shares are doing best right now, get scant attention. More than 3,000 companies in the U.S. stock market hold a market capitalization of less than $65 million or so, and of those, 90 percent have no Wall Street coverage.

Areas that benefit wealthy investors, such as municipal bonds, commodities, corporate bonds and currency trading, are uncharted territory for most ordinary folks, who tend to rely on mutual funds. Yet there are so many mutual funds, about 3,400 equity-based ones, and their fees are so onerous, their track records so pockmarked, it's a wonder investors rely on them for retirement and other savings.

"It's all too much -- way too many choices," says Biderman, a highly regarded researcher who is currently short the expensive Nasdaq 100 with his Trim Tabs model portfolio. "All of these funds are trying to beat some benchmark, and of course few of them do." See the Biderman interview on CBS MarketWatch.

In this market, it's getting harder to know just who's right and who's full of beeswax. That's the perennial problem on Wall Street. Even the con artists in lower Manhattan believe in what they're selling. That's the sign of a great con artist.

In all fairness, detecting the beeswax is not as tough as it used to be in this cynical age of jaded investors. These days, everyone knows the auditors are full of garbage. (See David Callaway's column.) Everyone knows most of the chieftains and their CFO flunkies are in the game for themselves and not for shareholders.

The fund managers have a vested interest: Most of them are well paid, thanks to the fees they skim off the top, and they're loath to criticize the companies whose shares they own in vast amounts. Plus, the market-neutral and short-bias hedge funds, one of the few places in this country where analysts are doing excellent independent research, rarely go on the record with their favorite short-sale positions.

The independent researchers who are worth their weight in gold usually service the big players, the hedge funds and trading desks. These are outfits such as Technimentals Research Group in Manhattan. It's a pity that Technimentals' work on the stock, bond and currency markets is expensive and largely not available to ordinary folks.

Most of us are not permitted to read the notes Technimentals and other quantitative researchers send to their hedge-fund and trading-desk clients, like this one Thursday: "Not only is Nasdaq turning down from its 50 and 200 day moving average, but its daily momentum ... is also turning down. This suggests more price weakness should follow."

Technimentals sees weakness ahead for these big tech stocks: Check Point Software
CHKP, +0.74%
EBay
EBAY, +1.87%
Cisco Systems
CSCO, +0.37%
and Microsoft
MSFT, +1.57%
Technimentals also points to the relentless strength of gold-mining stocks, which in the old days was always a warning signal for the overall stock market. The AMEX Gold Bugs Index Thursday hit an all-time high.

Actually, a bit of worthy quantitative research is available to individuals via Schaeffer's Investment Research, where senior analyst Christopher Johnson and his team, relying on technical indicators, own a stellar record for calling the breaking points of those horribly expensive computer stocks
QQQ, +0.78%

My money is also on the folks who get it right year after year after year. They're a small group of newsletter editors, and most of them -- surprise -- don't work on Wall Street.

These are people like Al Frank and John Buckingham, editors of The Prudent Speculator in Laguna Beach, Calif. For the past 20 years, The Prudent Speculator's style of picking stocks has been the cream of the crop among investment newsletters. Its 19 percent annualized returns place The Prudent Speculator No. 1 in a ranking of newsletters by The Hulbert Financial Digest, a long-standing tracking service.

"I think what you are seeing is Main Street, represented by the newsletter writers, becoming a force to be reckoned with on Wall Street," says Mark Hulbert, whose service has been compiling ratings on financial newsletters since 1982.

The advantage of newsletter writers, both the ones who wear Hawaiian shirts and those ones who still own dark-blue suits, is they're not afraid to go against Wall Street. The best newsletters, as measured by Hulbert's tracking of their model portfolios over 20-year, 15-year, 10-year and five-year time frames, right now are 68 percent invested in stocks, with the rest in cash.

Their top picks this month are boring businesses with steady cash flows: regional banks, gold companies such as Barrick Gold Corp.
ABX, -2.95%
restaurants and auto parts suppliers. But their biggest holdings are in cash. That means the best and brightest minds are still skeptical about the overpriced U.S. stock market.

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